Edited version of private advice

Authorisation Number: 1051820778246

Date of advice: 25 March 2021

Ruling

Subject: GST and sale of new residential property

Question 1

Are A and B, as co-owners of property X located in Australia (the property) required to register for GST under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and liable to pay GST when selling the new residential premises built on the property?

Answer

A and B are in a partnership carrying on an enterprise under paragraph 9-20(1)(b) of the GST Act when they purchased the property, build residential premises on it and sell the premises after its construction.

Since the proceeds from the sale of the new residential premises would exceed the GST registration turnover threshold of $75,000, the partnership will be required to register for GST under section 23-5 of the GST Act. As such, the sale will be a taxable sale under section 9-5 of the GST Act and the partnership will be liable to pay GST on the sale.

Relevant facts

A is registered for GST carrying on a candle making and retailing business.

B is not registered for GST. B's business is operated through a company that is currently inactive. B's previous activity was work as a civil engineer.

A and B are engaged to be married. They jointly purchased two vacant lands X and Y located in Australia.

Vacant land Y

A and B entered into a contract for the purchase of a vacant land Y in 2018. Settlement occurred in 2018.

In 2019 they engaged a builder to build a house on the land which will be used as their principal place of residence. The construction was completed in 2020.

Vacant land X

A and B entered into a contract for the purchase of vacant land X in 2018. Settlement occurred in 2019.

They purchased this vacant land in order to preserve the view from their principal place of residence which would be on vacant land Y. This will be done by constructing a single storey residential premises on the land that would preserve the views and selling the premises after its construction.

In 2020 A and B engaged a builder to build residential premises on the land. The estimated time for the completion of the house is 2021 at which time they intend to sell the premises.

The purchase of the land was funded by cash. The building of the house is funded via a 20% deposit by A and B with the remainder being financed via a bank loan taken jointly by A and B.

A and B has a joint account in the form of an offset account against the loan. There is no written agreement between A and B regarding the purchase of the land and the building of the house. This is because they are engaged to be married and they consider the arrangement to be domestic.

Neither A's business nor B's business is involved in the purchase of the land and the construction of the residential premise to be sold.

The sale of the new residential premise will be sold under a single contract. They will sell the premise to free up equity that is tied up in the land purchase at a breakeven price. A and B are happy to accept a small loss on the sale to ensure the views are preserved.

A and B after considering the price of recent sales in the area are of the view that their activities are most likely carried on without a reasonable expectation of profit.

A and B do not own any properties other than the properties located at xx and xx Xxxxxxx Street.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

Reasons for decision

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Summary

A and B are in a partnership that is carrying on an enterprise under paragraph 9-20(1)(b) of the GST Act when they purchased the vacant land X, build a residential premise on the land and selling the premise after its construction.

Since the proceeds from the sale of the new residential premise would exceed the GST registration turnover threshold of $75,000, the partnership will be required to register for GST under section 23-5 of the GST Act. As such, the sale will be a taxable sale under section 9-5 of the GST Act and the partnership will be liable to pay GST on the sale.

Detailed Reasoning

GST is payable on a taxable supply.

A supply is a taxable supply under section 9-5 of the GST Act if:

•         the supply is made for consideration; and

•         the supply is made in the course of an enterprise carried on by the supplier; and

•         the supply is connected with Australia; and

•         the supplier is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

When the property is sold, paragraphs (a) and (c) in section 9-5 will be satisfied as the sale is for consideration and the sale is connected with Australia as the property is in Australia.

The sale of the new residential premise is not a GST-free supply. Further it is not an input taxed supply as a sale of new residential premises is not an input taxed supply under section 40-65 of the GST Act.

We will now consider paragraphs (b) and (d) of the GST Act.

Paragraph 9-5(b) of the GST Act

The term 'enterprise' is defined for GST purposes in section 9-20 of the GST Act and includes, among other things, an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)) or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

In the form of a business

Paragraphs 170 to 232 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business.

Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, lists indicators of carrying on a business:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

•         activity is systematic, organised and carried on in a businesslike manner and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge or skill.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Application to your situation

From the facts given, A and B initially purchased vacant land Y on which they built a house for their private use. Around the same time, they purchased the adjoining vacant land, Vacant land X in order to preserve the views from their residence. The intention was to build a single storey residential premise on the land and sell it after construction.

A and B contracted a builder in 2020 to build the residential premise. Construction will be completed in 2021. The costs associated with the construction is financed through a joint bank loan application made by A and B.

A and B have never previously been involved in property development or the construction of new premises.

We consider that the activities they have undertaken do not display the salient indicators of a business, which are transactions entered into on a continuous and repetitive basis. This is a one-off project that is not considered to being carried out in a manner similar to other property development businesses.

Given the above, we do not consider their activities regarding the purchase of the land, construction of the dwelling and pending sale to have been done in the form of a business.

In the form of an adventure or concern in the nature of trade

Paragraph 234 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

•         the subject matter of the realisation;

•         length of period of ownership;

•         frequency or number of similar transactions;

•         supplementary work on or in connection with the property realised;

•         circumstances that were responsible for the realisation;

•         motive

According to paragraph 249 a trading asset is generally dealt with or traded within a short time after acquisition. An example is the case of Edwards (Inspector of Taxes) v. Bairstow and Another where the taxpayers purchased a complete cotton spinning plant in 1946 with the object of selling it as quickly as possible at a profit. They had no intention of holding it by using it as an income producing asset and it was not purchased for their pleasure or enjoyment. It was eventually sold in five separate lots over a fifteen-month period.

Paragraph 254 of MT 2006/1 states that if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

Paragraph 258 of MT 2006/1 further states that United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purpose.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

•         there is a change of purpose for which the land is held;

•         additional land is acquired to be added to the original parcel of land;

•         the parcel of land is brought into account as a business asset;

•         there is a coherent plan for the subdivision of the land;

•         there is a business organisation - for example a manager, office and letterhead;

•         borrowed funds financed the acquisition or subdivision;

•         interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•         there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•         buildings have been erected on the land.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

Application to your situation

In this case, the intention of A and B at the time of purchasing vacant land X in 2019 was to preserve the views from the house they would build on vacant land Y which would be used as their principal place of residence. The plan was to build a single storey residential premise on vacant land X and sell it after construction.

A and B jointly contracted a builder to build the residential premise on vacant land X. The costs associated with the construction is financed through a joint bank loan application made by A and B and all expenses are paid through their joint account. The sale would be in a single contract.

Their activities illustrate that there was a coherent plan in carrying out the activities. We also consider that their activities constitute a level of development of the property with the construction of the new residential premises on the vacant land.

Given the intentions at the time of acquiring the property and the subsequent activities, we consider that the activities of A and B fall within the scope of an isolated transaction of real property and not a mere realisation of a capital asset as discussed in MT 2006/1. Their activities will therefore be considered an 'enterprise', being an activity or a series of activities, done in the form of an adventure or concern in the nature of trade as defined in subsection 9-20(1)(b) of the GST Act.

Paragraph 9-5(d) of the GST Act

Under section 23-5 of the GST Act you are required to register for GST if you carry on an enterprise and your turnover meets the GST registration turnover threshold (currently $75,000).

Carrying on an enterprise

As discussed above, A and B are carrying on an enterprise. When carrying on the enterprise, they jointly took a loan to fund the construction of the residential premise, have a joint bank account to pay expenses related to that property, jointly appoint the builder to build the residential premise and they will sell the property under a single contract.

In this instance we consider that A and B are in a partnership when carrying on an enterprise in the form of an adventure or concern in the nature of trade.

For more information on partnership refer to the following rulings which are available at ato.gov.au:

•         Goods and Services Tax Ruling GSTR 2003/13: general law partnerships

•         Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property

GST turnover

Your GST turnover meets the registration turnover threshold if either:

•         your 'current GST turnover' (your turnover for the current month and the previous 11 months) totals $75,000 or more ($150,000 or more for non-profit organisations)

•         your 'projected GST turnover' (your total turnover for the current month and the next 11 months) is likely to be $75,000 or more ($150,000 or more for non-profit organisations).

The transfer of a capital asset is disregarded when calculating your projected GST turnover under section 188-25 of the GST Act.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets providing the following:

•         Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

•         Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time.

In this case the property was always held for the purpose of sale. The property was not held for personal enjoyment or investment. The property is a revenue asset and not a capital asset. Therefore, the proceeds from the sale of the land with the new residential premise would not be excluded from the projected GST turnover of the partnership.

A and B are in a partnership carrying on an enterprise and the proceeds from the sale made by the partnership would exceed the GST registration turnover threshold of $75,000, the partnership will be required to register for GST under section 23-5 of the GST Act.

Since all the paragraphs in section 9-5 of the GST Act are satisfied the sale of the new residential premises will be a taxable sale and the partnership will be liable to pay GST on the sale.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).